Model for successfully funding multi-user port and

rail facilities

9 July 2014

www.balanceresources.com.au

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Disclaimer

The information contained herein has been prepared by Balance Resources solely for the use of the recipient. It is confidential and for information and discussion purposes only. The information does not constitute, in any jurisdiction, a recommendation, invitation, offer, or solicitation or inducement to buy or sell any financial instrument or product, or to engage in or refrain from engaging in any transaction. It is not the intention of Balance Resources to create legal relations on the basis of the information contained herein. This information does not purport to contain all relevant information. Nothing in this document should be construed as legal, tax, accounting or investment advice. This document has been prepared without taking into account the objectives, financial situation or needs of any recipient. Neither Balance Resources nor any of its respective affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein.

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Overview

1. Challenges for multi-user infrastructure development

2. Necessity for collaboration

3. Role of Government

4. How much regulation should we have?

5. Case Study – Wiggins Island Coal Export Terminal (WICET)

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Key Challenges

• Macro factors (commodity price/exchange rate etc.) • Funding • Government and other regulatory approvals (particularly environmental) • Proving a project is technically and commercially viable (progressive feasibility

work). Difficult with multiple parties at different stages of development! • Project timing misalignment (project / rail / port) • Independent proponents and differing business strategies, retaining market

sensitive information etc • Coordination of work streams

Strategic (critical and dynamic) Technical Commercial Government / Regulatory Funding

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Key Challenges

Overall challenge for multi-user developments is the “Chicken & Egg” nature of infrastructure:

A project is not “bankable” without an infrastructure solution BUT

How can a funding be secured for an infrastructure solution before proving the project is “bankable”?

No single or easy answer, but solution will be when all work streams are past “the point of no return” (i.e. the point that bankability becomes highly likely).

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Necessity of Collaboration

Major infrastructure developments and expansions require a high level of cooperation amongst new mine explorers and developers Opportunities • Ability to start afresh rather than ‘patch’ legacy systems • Leverage collective experience in designing new infrastructure • Draft well written agreements that promote the best interests of each

proponent in the integrated supply chain • Achieve greater transparency in supply chains • Recognise and appreciate differing business strategies and agendas, but

as proponents, commit to always look for the win-win solutions Reality • Unlikely to achieve utopian outcomes, but great opportunity to improve

upon the past and build a better future

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Role of Government

“Good Old Days” – at least a chance of funding / underwriting / building the infrastructure as a ‘build it and they will come’ approach “The New Reality” – not nothing, but not everything, so what is the new role for Governments in Australia? • Establishment of a workable and stable process (for example,

access policy regimes) • Assist to clarify parties’ roles and responsibilities • Encourage better communication and collaboration between

users, service providers and the State • Enable less interfaces between stakeholders • NOT to ‘pick a winner’

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Level of Regulation

• Ideal is somewhere between none and ‘too much’ • If none, monopoly power is exercised by infrastructure owners

(the natural counter argument is ‘why shouldn’t they exercise that power, as they paid for it?)

• If ‘too much’, then like all other red tape and green tape, it’s a natural disincentive to any investment

• Either way too much regulation can reduce competition and restrict growth

• Key for investors is simplicity, consistency and clarity

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Regulation Challenges

Consequences of poor regulation (perceived or otherwise): • Almost worse than none – monopoly power in effect exercised by

delays to regulatory processes • Economically inefficient • Increased sovereign risk • Decreased incentive to invest in Australia • Reduced competitiveness of export supply chains • Inbuilt inefficiencies – policy framework drives unintended

outcomes

Need the right balance for sensible commercial outcomes

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Development Alternatives

There are a number of different funding models that can be utilised when developing infrastructure projects:

In an age of reduced Government funding for major infrastructure projects, there has been a significant rise in the incidence of user- funded infrastructure developments (fully or partly funded)

Government (State and/or Federal) funding

Third-Party / Investor funding

Consortium-based user funding

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Case Study – WICET

• Wiggins Island Coal Export Terminal Pty Limited (WICET) is owned

by a consortium of coal producers

• Will be operated by Gladstone Ports Corporation (GPC) (currently

GOC but most likely will be privatised)

• Industry ownership and funding model with 8 coal company

‘A Class’ Shareholders

• $2.5 billion of private funding with a total $4 billion external

funding envelope

• 27Mtpa Stage 1 capacity with an ultimate design capacity of

110Mtpa

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Case Study – WICET

Rail Infrastructure and Stage 1 Mines

(now Aurizon)

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Case Study – WICET

May 2008 Industry invited to propose an alternative infrastructure development model to QLD State Government

August 2008 Proposal for industry to own and finance the terminal with GPC as contract operator submitted with broad coal industry support

October 2008 Industry group selected as preferred proponent December 2009 Framework Deed (including access policy) and ancillary documents

executed with State and Gladstone Ports Corporation (GPC) May 2010 Access Policy (WITAP) agreed between industry group and State August 2010 Eight shippers agree to contract 27Mtpa of Stage 1 capacity November 2010 Information Memorandum released September 2011 Financial Close March 2015 Scheduled Stage 1 completion

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Case Study – WICET

The WICET development model facilitates efficient infrastructure

development through:

• Industry owned and largely privately funded

• Open, equitable and transparent Access Policy (Wiggins Island

Terminal Access Policy (WITAP)) agreed with State, port

corporation and industry

• Broad industry support

• No cost to Government

• Terminal charges limited to cost recovery only

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Case Study – WICET

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Case Study – WICET

Commercial Framework

Alignment

•Risks, ownership and control rests with Shippers

•Rights of future users preserved

•Objective to reduce infrastructure costs

•Coal chain performance of one Shipper not to adversely affect others

Capacity

•Capacity fully contracted under 10 year Take or Pay Agreements

•Terminal Handling Charges based on cost recovery model

•Rail and Port capacity also required to be contracted by Shipper

Finance

•Underpinned by ToP Agreements

•Optimised for lowest overall cost

•Shareholders were required to provide subordinated funding

Tenure •Long term tenure agreements with State, GPC and Aurizon

Construction •Contracted and managed by WICET

•No risk to State or GPC

Operations •GPC contracted as Operator – responsible for day to day operation

•WICET approves Annual Plans and Budgets

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Case Study – WICET

Funding Overview Element

Tiers of Capital • Senior Facilities • GiLTS (subordinated notes) • WIPS (preference securities)

External Funding Envelope • P90+ capital cost estimate + • Six months delay to Mechanical Completion + • Interest during construction, working capital + • Ramp up costs

Shareholder Support • ToP Guarantees available to meet costs above P90 level

Revenue • Capacity fully contracted • Take or Pay Contracts • Cash cost recovery tariff model – variable tariff, not regulated

Due Diligence • Independent Reports provided to financiers: Market, Technical, Environmental. Logistics. Insurance, Tax, Accounting, Legal

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Case Study – WICET

Wiggins Island Terminal Access Policy (WITAP)

Governs items such as:

• Open access processes

• Capacity allocation and trading at the terminal

• Expansions processes

• Termination rights

• Pricing mechanism and Terminal Handling Charges

Potential users of the port need to qualify to apply for access (proof of JORC

reserves and resource base; mine technical feasibility; evidence of

supporting infrastructure; security), reviewed by independent credible

experts

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WICET Collaboration

Challenges: • Multiple existing and new miners – some requiring expansion tonnage • Numerous large, junior & mid-tier explorers seeking capacity • Constrained existing rail network requiring significant upgrades • 2 above-rail operators (Aurizon Operations and Pacific National) • Port of Gladstone (Government owned) at full capacity

Result: The successful greenfield development of the Wiggins Island Coal Export Terminal (WICET) – a multiuser, open access facility owned and funded by a consortium of producers, together with upgrades to the existing rail network to support the increased volumes

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Infrastructure Investment

Providing leadership and guidance on securing, developing, delivering and managing essential infrastructure to support the resources sector:

Providing leadership and guidance on investment opportunities and transactions relating to both infrastructure and resource projects:

Bid preparations

Identify investment opportunities

Government liaison

Market intelligence

Connecting Joint Venture Partners

Analysis and due diligence

Risk Management

Project Management

Balance Resources

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Contacts

www.balanceresources.com.au

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Western Australia Level 3, 267 St Georges Tce Perth, WA 6000

Northern Territory GPO Box 4783 Darwin, NT 0801

Jamie Freeman – Director

BTech MBA GDIFSM GCMM GAICD Mobile : 0431 912 776 Email : jfreeman@balanceresources.com.au

Michael Ryan – Director

BCom LLB(Hons) CA AAICD Mobile : 0427 701 666 Email : mryan@balanceresources.com.au

Jim Brosnan – Associate Director

BEng (Met.), MAICD Mobile : 0439 928 841 Email : jbrosnan@balanceresources.com.au

Wayne Trumble – Associate Director

MAICD, HBA Mobile : 0438 939 767 Email : wtrumble@balanceresources.com.au

Toronto, Canada Suite #466, 100 2 Toronto St Toronto ON M5C 2B5